Has Finance been in touch about component accounting?

The latest International Financial Reporting Standards (IFRS) recommend that component accounting is introduced by March 2012.

The latest International Financial Reporting Standards (IFRS) recommend that component accounting is introduced by March 2012.

Component accounting requires organisational financial statements to account for housing assets by their constituent parts. Put simply, under component accounting regulations, the land, structure and key components of a house, such as the windows, bathroom and kitchen, need to be listed separately in the accounts.

As most of us are more familiar with accounting complete programmes of works, this change to accounting individual properties and their constituent parts, brings with it an enormous data burden. There are three specific challenges for your organisation…

Who Will Do it?

Can properties be broken down into their components accurately by a finance department without the engagement of the asset management team?

Amongst the early adopters of component accounting, the breakdown of properties into their components seems to be gathering pace in the finance teams, without any input from asset management.  

This is a mistake. The introduction of component accounting must result in a single, organisation-wide view of the remaining life of the assets and their replacement cycle. Finance departments cannot hold one opinion of remaining life or replacement cost and asset management another. Minor discrepancies are likely to creep in due to the high volume of records, but widespread divergence in the figures will not pass muster with the auditors. This may not be to everyone’s liking, finance and asset management need to be joined at the hip when it comes to component accounting.

What About Divergence?

What level of divergence between the asset management database and the financial component accounting register will be acceptable to the auditors?

There are two stages to component accounting – firstly during the initial implementation of component accounting and secondly thereafter. During implementation, auditors will generally want to see overlap between the asset management database and the financial component accounting register although they do not expect a 100 per cent match given the nature of the information flows.

Significant variances will no doubt be heavily questioned by auditors as they have a duty of care to ensure the organisation’s financial statements are a true and fair reflection of the organisation’s finances.

Once component accounting is live, this link between asset management and financial accounting will need to be maintained and policed so divergence does not creep in. Significant divergence will prevent auditors from signing off an organisation’s accounts. When setting up component accounting, we’ll need to be thinking about a long term strategy for maintaining it.

Will Arbitrary Figures Work?

Can finance teams fudge the component values using a property matrix and an arbitrary percentage-based breakdown of present asset values in the balance sheet?

It may seem a good shortcut, but hopefully you’ve picked up by now, the answer to this question is a resounding ‘No!’ Widespread and blind use of this method will not be accepted.

Having said that, in specific situations where all other reasonable data sources for component values have failed to deliver reliable information, this approach would be accepted as a last resort. But only as an interim solution whilst more reliable information is found. It buys the organisation time but does not provide a solution, and the implications of remedying this short term fix might not be worth the initial gain!

So whether we like it or not, the introduction of component accounting is going to bring the finance and asset management functions closer together. Component accounting cannot be implemented by a finance team alone, so the outstanding question is a simple one; has Finance been in touch yet? If the answer is no, then pick up the phone as they need the input of asset management and cannot succeed without you!

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